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State lawmakers reduced the incentive to conserve power as prices rose

WASHINGTON — Deregulation of electricity in California “created almost textbook conditions” for energy companies to keep power prices unfairly high in 2000 and 2001, a congressional investigation finds.

“Wholesale electricity suppliers exercised market power by raising prices above competitive levels,” the General Accounting Office concluded in a report released Tuesday.

The GAO report is the latest of several studies that found that serious structural problems in California’s deregulation paved the way for the soaring electricity prices and rolling power blackouts in 2000 and 2001.

It was made by public by Democratic Reps. Peter DeFazio of Oregon and Jay Inslee of Washington the day before the Federal Energy Regulatory Commission is expected to adopt new rules aimed at preventing a repeat of the energy crisis, which reverberated across the West in the form of energy price spikes.

The report blamed several flawed rules for allowing prices to rise even during hours of light demand.

State lawmakers froze retail prices for consumers, reducing, if not eliminating, the incentive to conserve power as prices rose, the GAO said.

Until the height of the crisis, California regulators discouraged utilities from entering into long-term contracts for power. The reliance on spot sales enabled power wholesalers to withhold electricity from the market “until it was critically needed,” making it possible to charge exorbitant prices.

Utilities flirted with financial ruin struggling to meet demand amid wholesale power costs that reached $300 per megawatt hour. One megawatt is enough to power about 750 homes.

Even when price caps first were imposed in late 2000, they were ineffective, the GAO said, but did not analyze why. The report also did not analyze certain pricing and trading strategies that Western politicians have said allowed Enron Corp. and other companies to manipulate the energy market.

Western lawmakers sharply criticized FERC for failing to intervene aggressively as wholesale electricity prices soared in 2000 and early 2001. Until last summer, FERC refused to impose any significant price controls, contending price caps would impede energy production, worsening the supply problem.

Wholesale cost receded after FERC imposed a price cap last summer, utilities and state agencies signed long-term contracts and the price of natural gas, the fuel for many power plants, fell.